Late last Friday, as many in the pensions industry tried to doze quietly on their trains after an exhausting but great PLSA conference, the Department for Work and Pensions (DWP) published some guidance on the charge cap that applies to qualifying DC schemes.
Much of the guidance is dry techie stuff, but there were a few interesting points – the most significant of which relates to property investments. This is a non-statutory guidance – i.e. it has no legal force, although it may have an evidential value. More on this point below.
The guidance specifies what charges are outside the cap. It mirrors the five items given in Charges and Governance regulations but adds a sixth: property holding and maintenance costs. These costs are the cost incurred while owning a property – for example, of insuring and managing a property. These, the guidance acknowledge, are not “transaction costs” because they do not relate to the acquisition or sale of property. Despite this acknowledgment, the guidance says that they can be excluded from the cap, i.e. charged in addition in the same way that transaction costs are.
Property is a good asset to hold in DC. I have absolutely no problem with property as an asset class, but I do have a problem with this guidance.
Firstly, the DWP made clear in their response to the consultation on the Charges and Governance regulations that they did not see a case for excluding property holding and maintenance charges from the cap. In fact, they made clear that they saw exactly the opposite “we consider it appropriate for the charge cap to be neutral with regard to different asset classes and that any exclusion of expenses connected with particular types of investment could influence investment strategies with potentially unintended consequences”. So, an about face by the DWP, which may not be of consequence except that this guidance is non-statutory.
The regs are clear that “trustees … must not impose … charges which exceed the limits”, where “charges” are defined to exclude five items, not six and not property holding and maintenance costs. In other words, this guidance seems to want to change the law.
This, in itself, would not be a problem if it were only the DWP or other government department that could prosecute the law (it would, in effect, be them saying “this is the law, but we’ll not take action against you if you break it”) but that’s not the case here. Any member of a DC scheme, aggrieved at paying property holding costs could (a) point to the regulations (i.e. the law) and make a factual complaint of non-compliance and (b) argue that it is unreasonable to treat holding costs as a transaction cost – because they aren’t.
Where does this leave trustees?
The guidance apparently clears the way for trustees to hold property and not worry that their holding costs will cause them to breach the charge cap. My argument here, however, is that there must still be significant uncertainty about that conclusion.
The other interesting bits
The guidance introduces another definition of “default” – the “true default”. This now exists along side the “default default”, the “deemed default” and “bespoke default”!
The charge cap compliance assessment takes place over a year but can be pro-rated, retrospectively, for joiners and leavers.
The FCA has apparently published comparable rules to apply to workplace personal pensions. I haven’t compared, but I hope they duplicate – otherwise we’ll end up with another arbitrage opportunity.